Tractor Supply Company — Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company is a rural lifestyle retailer operating Tractor Supply, Del’s, and Petsense stores, with e-commerce channels. As of June 26, 2021, the company operated 2,129 stores in 49 states, including 1,955 Tractor Supply and Del’s stores and 174 Petsense stores. The filing covers the fiscal three and six months ended June 26, 2021, compared with June 27, 2020. Results are unaudited and seasonal, with the second and fourth quarters historically producing the highest sales and profits.
Financial Performance and Position
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Net sales | $3.602 billion | $3.176 billion | 13.4% increase |
| Gross profit | $1.287 billion | $1.157 billion | 11.3% increase |
| Gross margin | 35.8% | 36.4% | Down 67 basis points |
| Operating income | $485.9 million | $447.7 million | 8.5% increase |
| Net income | $370.0 million | $338.7 million | 9.3% increase |
| Diluted EPS | $3.19 | $2.90 | 10.0% increase |
| Metric | Six Months 2021 | Six Months 2020 | Change |
|---|---|---|---|
| Net sales | $6.394 billion | $5.136 billion | 24.5% increase |
| Gross profit | $2.271 billion | $1.818 billion | 24.9% increase |
| Gross margin | 35.5% | 35.4% | Up 12 basis points |
| Operating income | $716.4 million | $560.3 million | 27.9% increase |
| Net income | $551.4 million | $422.5 million | 30.5% increase |
| Diluted EPS | $4.73 | $3.61 | 31.0% increase |
Second-quarter comparable store sales increased 10.5%, with comparable transaction count up 4.5% and transaction value up 6.0%. Six-month comparable store sales increased 21.2%, with transaction count up 11.5% and transaction value up 9.7%. E-commerce sales reached record levels in both periods.
Second-quarter SG&A, including depreciation and amortization, was $801.6 million, or 22.3% of sales, compared with 22.4% in the prior-year quarter. Six-month SG&A was $1.555 billion, or 24.3% of sales, compared with 24.5%. COVID-19 response costs were approximately $13 million in the second quarter and $41 million for the first six months.
Cash and cash equivalents were $1.412 billion at June 26, 2021, compared with $1.342 billion at December 26, 2020 and $1.206 billion at June 27, 2020. Working capital was $1.484 billion. Inventories were $1.993 billion, up from $1.783 billion at year-end 2020, primarily to support store growth and strong sales; inflation also contributed.
- Operating cash flow for the first six months was $808.9 million, compared with $993.1 million in the prior-year period.
- Capital expenditures were $216.0 million, compared with $86.6 million, primarily reflecting store remodels, technology, and distribution capacity investments.
- Financing activities used $522.9 million, including $456.7 million of share repurchases and $120.5 million of dividends.
- Total outstanding borrowings were $1.000 billion, with $985.4 million of debt reported after discounts and issuance costs. All debt was classified as long-term.
- The company had $68.1 million of outstanding letters of credit and was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales and earnings grew substantially, although second-quarter gross margin contracted because of higher transportation costs, the Neighbor’s Club loyalty-program relaunch, and a greater mix of consumable, usable, and edible products.
- Six-month gross margin improved modestly because of fewer promotions and less clearance activity, partially offset by transportation costs and loyalty-program costs.
- Operating cash flow declined $184.2 million year over year, mainly because working-capital changes generated less cash, particularly from inventory investment.
- Capital expenditures increased $129.4 million, reflecting strategic store, technology, and distribution-center investments.
- Share repurchases increased to $456.7 million from $263.2 million. The company repurchased 2.7 million shares during the first six months and had $687.2 million remaining under its authorization at quarter-end.
- The company’s debt structure changed from the prior-year period: the $650 million 1.75% senior notes due 2030 and $200 million November 2020 term loan were outstanding, while prior-year short-term pandemic-related term loans had been repaid.
Guidance, Outlook, Risks, and Unusual Items
- Management expects a full-year 2021 effective tax rate of 22.1% to 22.4%.
- Fiscal 2021 capital expenditures are estimated at approximately $500 million to $600 million.
- The company expects to open approximately 80 new Tractor Supply stores and 10 new Petsense stores in fiscal 2021, although timing may be affected by COVID-19-related restrictions.
- A new approximately 900,000-square-foot distribution center in Navarre, Ohio is expected to be completed by the end of fiscal 2022. Contractual commitments were approximately $75 million at June 26, 2021.
- The company agreed to acquire Orscheln Farm and Home, with 167 stores, for approximately $320 million in cash, subject to regulatory clearance and customary closing conditions. The company intends to fund the transaction with cash on hand.
- COVID-19 continues to create uncertainty regarding consumer demand, staffing, operating costs, supply chains, inventory availability, and future accounting estimates. Management expects some incremental pandemic-related costs to continue after the pandemic.
- Other principal risks include inflation and transportation costs, supply-chain constraints, seasonality and weather, competition from online retailers, execution of store and distribution-center expansion, foreign-supplier reliance, labor availability, technology and cybersecurity risks, regulatory changes, tax matters, and litigation.
- A derivative lawsuit alleges proxy and fiduciary-duty violations related to diversity and inclusion disclosures. The company disputes the allegations and does not currently expect a material financial-statement impact, although the outcome is not determinable.
- The board declared a quarterly dividend of $0.52 per share on August 4, 2021, payable September 8, 2021.
Important Facts for Investors to Verify
- Whether strong comparable-sales trends continue after the significant COVID-19-related demand benefit in the prior periods.
- Whether transportation, wage, supply-chain, inflationary, and loyalty-program costs further pressure gross margin.
- The timing, regulatory approval, funding, and integration results of the proposed Orscheln acquisition.
- Progress and final cost of the Navarre distribution center and planned store expansion.
- Whether operating cash flow can support capital expenditures, dividends, repurchases, and the proposed acquisition while maintaining liquidity.
- Future debt refinancing requirements, interest-rate exposure, covenant compliance, and the transition away from LIBOR referenced in the company’s interest-rate arrangements.
- Developments in the derivative litigation and any other legal or regulatory matters.